Review – ShadowStats

This week we look as ShadowStats.com which provides one of the key ingredients in the investment puzzle: Financial Market Liquidity.

The website is built on the simple premise that the US Government can and has changed the parameters for certain politically sensitive statistics over the years. By going back and using the old or alternative definitions for inflation, unemployment and the like, John Williams is able to demonstrate how publicly released statistics can vary significantly from reality.

M3 Money Supply

But the feature that brings us back month after month is the M3 Money Supply chart which is offered for free. This is a very useful service because the Federal Reserve decided to stop publishing the M3 number from the end of 2006.

Although M3 is not usually considered a predictive indicator for financial market performance, these are not usual times. We have just experienced a massive collapse in what was dubbed the “Shadow Banking Industry” which was the backstop for much of the consumer credit that drove the US economy in the 90s and 2000’s.

With the money center banks playing an arbitrage game with the Fed to rebuild damaged balance sheets, the actual amount of “high powered” quantitative easing money finding its way into the financial markets is limited. When that situation changes (and it will), we should see an uptick in M3 as a confirmation that a financial asset bull market actually has legs and is not just another bear market blip.